Are there ways to minimize the tax burden on a severance payment?
January 5, 2022 | 40,00 EUR | answered by Albrecht Schlüter
Dear tax advisor,
My name is Quentin Fischbacher and I have been working in a company for 15 years, which is now planning a restructuring. As part of this, I have been offered a severance package as my position is being eliminated. The severance amount is 50,000 euros and I am concerned about the potential tax implications.
My previous annual gross income was 60,000 euros, so I am worried that the severance package could significantly increase my tax burden. Are there any ways to minimize the tax implications of a severance package? I have heard that there are certain tax regulations that could help me, but unfortunately I am not familiar with this area.
I would like to know if there are options available to me as an employee to optimize the tax treatment of the severance package. Are there any specific exemptions or special regulations that I could take advantage of to reduce the tax burden? Or are there other tax planning strategies that could help me in this situation?
I would appreciate it if you could provide me with specific tips and recommendations on how to minimize the tax burden on my severance package. Thank you in advance for your assistance.
Best regards,
Quentin Fischbacher
Dear Mr. Fischbacher,
Thank you for your inquiry regarding the taxation of your severance payment. It is understandable that you are concerned about the tax burden that could arise from the 50,000 Euro severance payment. I would like to provide you with some information and tips on how you can minimize the tax burden on a severance payment.
First and foremost, it is important to know that a severance payment is generally subject to taxation. It is usually treated as other income and therefore subject to the progressive income tax rate. This means that the higher the severance payment, the higher the tax burden.
However, there are certain ways to minimize the tax burden on a severance payment. One option is to spread the severance payment over several years to treat it more favorably for tax purposes. This way, you can avoid the severance payment leading to a very high tax burden in one year.
Furthermore, there is the option to optimize the severance payment for tax purposes by taking advantage of certain tax exemptions and special regulations. For example, there is the so-called "Fünftelungsverfahren" or partial income procedure, under which the severance payment is only taxed at one fifth. This can significantly reduce the tax burden.
You can also consider if there are ways to tax-efficiently contribute the severance payment to a company pension plan. This can help reduce the tax burden.
It is advisable to seek advice from an experienced tax advisor who can provide you with individual recommendations on how to optimize your severance payment for tax purposes. Together, you can assess the possibilities and determine the best strategy for you.
I hope this information is helpful to you and remain available for further questions. Thank you for your trust and I wish you all the best for your professional future.
Sincerely,
Albrecht Schlüter
Tax Advisor
